Book Review: Louis Kaplow’s Competition Policy and Price Fixing

Undoubtedly you’ve seen television commercials by a well-known insurance company where one character turns to another and says: “you can save 15% or more in 15 minutes.” The other character then replies: “everyone knows that, but did you know . . . .” In antitrust, everyone knows that horizontal price-fixing agreements are per se illegal, while oligopolistic pricing is not. But did you know that there is an argument against this dichotomy? In a recent and thought-provoking book entitled Competition Policy and Price Fixing (Princeton University Press 2013), Harvard professor Louis Kaplow argues that the rule makes little or no sense, and instead urges that the core inquiry of antitrust enforcement be jettisoned in favor of the application of economic tests.

Kaplow begins by outlining various criticisms of the inquiry into price agreements – some of which are familiar. Agreements can be inchoate and hard to detect (even with access to relevant documents). Industry participants can develop means of communicating even if certain statements or techniques are off-limits. Outside observers, including courts and regulators, “are at a disadvantage in determining what is actually happening if parties attempt to be clever and subtle.” Lower courts sometimes infer agreements from communications and certain “plus” or facilitating factors, even where there is no explicit agreement and even though there is no uniformly agreed-upon list of plus factors. And even stating with precision what we mean by the term “agreement” is fraught with definitional, linguistic, and perhaps logical problems.

These problems alone might not justify overturning antitrust law’s somewhat single-minded focus on ferreting out price agreements, but Kaplow thinks that, when combined with another problem, they militate strongly in favor of a different approach. That problem is the “paradox of proof,” which he acknowledges has been noted in the literature but says has never been systematically explored. While in some settings greater ease of coordinated oligopolistic behavior and its resulting harmful effects make liability more likely, in others – where the danger is most serious – liability may become less likely.

The basic reason for the latter result is that, if successful interdependence is sufficiently easy (think about . . . two [competing] gasoline stations [that can see each other’s prices]), then firms may find it unnecessary to rely on communications [to agree on prices] . . . . so that any inference that they in fact did so is less plausible. As a result, evidence that a market is less conducive to successful coordinated oligopolistic pricing may make the inference that firms’ actions included at least some falling within [the rule against price-fixing] more plausible.

(Chapter 6, p. 126.) In other words – price communication (and price agreements) are more likely or at least more plausible in markets that are less susceptible to price agreements having any actual impact. That is the paradox of communications in the context of interdependent or oligopolistic pricing.

If we follow Kaplow’s prescription to eschew focusing on whether competitors entered into a price agreement, what test or tests should we instead apply? The answer, Kaplow says, is to look to economic evidence to distinguish between types of interdependent oligopolistic behavior. Economic theory has no corresponding term to the law’s use of the word “agreement,” but successful oligopolistic interdependence may be a good proxy for what the law is attempting to define. In this view, communications are not the holy grail of liability, but when they occur, they may suggest that competitors expect that communications will be helpful. They also may help to enforce coordinated oligopolistic pricing. The central question becomes “whether the communications at issue . . . are more likely to promote or suppress competition, and modern oligopoly theory offers the best set of tools for undertaking that inquiry . . . .”

To detect coordinated oligopolistic price elevation, then, one would look to market-based evidence, not to the existence of agreements per se. This evidence would consist of pricing patterns, including evidence of price elevations and nonresponsiveness to changes in market conditions. Additionally, regulators or private plaintiffs would look to the existence of facilitating practices – including price communications, advance price announcements, product standardization, cross-ownership of firms, the existence of side payments or most-favored-customer clauses, etc. Also relevant would be the overall conduciveness of the market to coordinated pricing (market structure, concentration, firms’ capacities, price transparency, product heterogeneity, etc.).

Professor Kaplow’s book raises some cogent criticisms of antitrust law’s current approach to price-fixing. While he does address the issue of administrability, I tend to think he overlooks how difficult it might be in practice to fully implement his proposals. Moving regulators and courts to an economic-based analysis is one thing; moving companies and their inside and outside counsel is another. It is difficult enough as it is to counsel companies on antitrust compliance. Repealing the per se prohibition on horizontal price agreements and mandating that counsel explain to their clients ex ante that inter-firm price communications and agreements might sometimes be unlawful, but sometimes might not, depending upon a complex stew of economic concepts and measurements, may just be a bridge too far.

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